Refund of Stamp Duty on cancelled agreements: Doctrine of Unjust Enrichment

Nanji Dana Patel vs. State of Maharashtra (Bombay High Court, Civil Appellate Jurisdiction); Writ Petition No. 1897 Of 2019; Dated: 27^th August 2024

Executive Summary

This article discusses the legal issues surrounding the refund of stamp duty in the context of cancelled agreements and highlights important legal doctrines such as unjust enrichment, condonation of delay, and the balance between substantive justice and procedural technicalities. The case involves a refund of ₹78,65,000 in stamp duty paid on a cancelled development agreement, which was initially denied due to a delay in filing the refund application. The Bombay High Court ruled that the delay could be condoned under Section 5 of the Limitation Act, 1963, prioritizing substantive justice over technical lapses.

The article explains the legal framework of stamp duty, with a focus on Section 48(1) of the Maharashtra Stamp Act, 1958, which imposes a six-month limitation period for filing refund claims. However, in this case, the court held that the limitation period should not bar the petitioner’s substantive right to a refund, particularly when failure to refund would result in unjust enrichment by the State.

The Doctrine of Unjust Enrichment is explored, especially in the context of indirect taxation, where refund eligibility depends on proving that the claimant has borne the tax burden and not passed it on to others. The article emphasizes that procedural technicalities should not obstruct financial fairness, and that equitable relief can be granted when justified, even if procedural deadlines are missed.

Key Legal Concepts

1. Limitation Period vs. Right to Refund

2. Condonation of Delay (Section 5, Limitation Act, 1963)

3. Doctrine of Unjust Enrichment

4. Substantive Justice Over Procedural Technicalities

5. Equitable Relief Based on Precedents

6. Procedural Technicalities

7. Reconsideration on Merits

8. Bona Fide Delay

This judgment reinforces the importance of fairness in legal proceedings and highlights the court’s role in preventing unjust enrichment by the government at the expense of taxpayers. It also sheds light on the broader implications for other areas of law, such as indirect taxation under GST, where similar principles apply.

1. Refund of Stamp Duty on cancelled agreements: Doctrine of Unjust Enrichment

1.1 While we do our best to comply with the laws which prescribe certain timelines for the compliance a provision, many time we miss the last date and feel doomed as if the lapse would cause a huge financial burden in the form of late fees, penalty, denial of exemption and deduction or refund of the taxes paid in excess. Well, the laws do provide for such financial cost in the above form if the timeline is not met but it is not always so. For example, if we miss filing Form 3CA-CD, Form-10 , Form 10B etc. the assessee may face consequences in the form of penalty and denial of exemption to trust u/s 11.

1.2 However, in a recent ruling, the Bombay High Court dealt with an important legal issue concerning the refund of stamp duty of Rs. 78,65,000/-levied on development agreement that was later cancelled and refund of the same was withheld on the grounds that the application for a refund was time-barred

1.3 The case involved the petitioner seeking a refund of 78,65,000, paid as stamp duty on a development agreement that was later cancelled. The authorities rejected the refund application because it was filed beyond the six-month limitation period specified under Section 48(1) of the Maharashtra Stamp Act, 1958.

1.4 However, the petitioner contended that he had already paid a substantial stamp duty of ₹1 crore on a subsequent conveyance deed for the same property. His argument was that the State had effectively collected stamp duty twice on essentially the same transaction, and not granting a refund of the earlier payment would result in unjust enrichment by the State. This case brings attention to critical aspects of the law surrounding the payment and refund of stamp duty in India.

 2. Legal Framework of Stamp Duty in India

2.1 Stamp duty is a tax levied on legal documents, typically required for the execution of property transactions and agreements. In India, stamp duties are governed by both central laws and state laws, with individual states empowered to legislate their stamp duty frameworks. The primary law governing stamp duty in India is the Indian Stamp Act, 1899, which lays out the provisions for the collection of stamp duty and procedures for refund.

2.2 Section 48 of the Maharashtra Stamp Act, 1958

In Maharashtra, stamp duty is regulated by the Maharashtra Stamp Act, 1958, a law that mirrors the principles of the Indian Stamp Act but with state-specific provisions. Under Section 48(1) of the Maharashtra Stamp Act, a party may seek a refund of stamp duty on the grounds that the stamp paper was not used for the intended purpose or the agreement has been cancelled. However, the application for such a refund must be filed within six months from the date the stamp paper was purchased. If the application is delayed beyond this period, the authorities generally reject it on the basis of it being time-barred.

2.3 The High Court’s Interpretation

In this case, the Bombay High Court recognized that although the petitioner had failed to file the refund application within the prescribed six-month period, this should not be grounds to deny justice. The petitioner invoked Section 5 of the Limitation Act, 1963, which allows courts to condone the delay in filing applications under exceptional circumstances, provided the applicant can show “sufficient cause” for the delay.

2.4 The Court noted that the petitioner was ill-advised, which led to the delay in filing the refund application. The Court further emphasized that the merits of the refund request were not disputed by the authorities—the sole reason for denial was the delay in filing. Hence, the division bench of Justice K R Shriram and Justice Jitendra Jain held that the delay could be condoned under Section 5 of the Limitation Act, and the petitioner’s refund application should be reconsidered on merits.

3. Important Legal Principles

Limitation Period vs. Right to Refund:

3.1 The petitioner argued, citing Supreme Court precedents, that while the limitation period could bar the remedy (i.e., filing the refund application), it should not negate the underlying right to claim a refund. This argument hinges on the distinction between procedural lapses (such as delays in filing) and substantive rights. In this case, the High Court agreed that technicalities should not stand in the way of justice, especially when the State would otherwise unjustly enrich itself at the expense of the petitioner.

 3.2 Section 5 of the Limitation Act, 1963:

The court applied Section 5 of the Limitation Act, which allows for flexibility in cases where a party can show a genuine reason for failing to act within the prescribed time. The petitioner demonstrated that his delay was due to poor legal advice, a justifiable cause for condoning the delay.

 4. Precedent on Condonation of Delay:

The Court referred to various precedents where it has been held that the law should not focus solely on procedural technicalities but should ensure that substantive justice is delivered. In this case, the petitioner had paid a large amount in stamp duty twice, and not allowing a refund would have amounted to an unjust financial burden on the petitioner.

5. The Concept of Unjust Enrichment

The principle of unjust enrichment is a legal doctrine stating that one party should not be allowed to profit at the expense of another without a valid legal basis. In the context of this case, the petitioner argued that the State would unjustly benefit by collecting stamp duty twice for essentially the same transaction. The Bombay High Court recognized this argument and concluded that the denial of the refund would result in unjust enrichment by the State.

6. Judgment

The Bombay High Court quashed the authorities’ order rejecting the refund and directed them to reconsider the refund application based on its merits, rather than dismissing it solely due to the limitation period. The Court’s decision reaffirmed that technical lapses should not obstruct the path to justice, particularly when the petitioner stands to suffer a significant financial burden, and the State stands to benefit unjustly.

7. Final Words

This ruling is significant because it underscores the importance of substantive justice over procedural technicalities, especially in cases involving refund of stamp duty. It also illustrates how courts can use equitable principles such as condonation of delay and unjust enrichment to ensure that the application of law does not lead to unfair outcomes. By invoking Section 5 of the Limitation Act, the Court demonstrated its willingness to provide relief in deserving cases where procedural delays have occurred due to justifiable reasons, thus promoting fairness in legal proceedings.

8. The core legal principles

The core legal principles emerging from the above judgment of the Bombay High Court regarding the refund of stamp duty are:

8.1 Distinction Between Limitation Period and Substantive Right:

The court emphasized that while a limitation period may bar the remedy (i.e., filing an application), it should not negate the underlying substantive right to a refund. This principle ensures that procedural lapses do not unjustly deprive a party of their legal entitlement.

8.2 Condonation of Delay under Section 5 of the Limitation Act, 1963:

The court applied Section 5 of the Limitation Act, allowing for the condonation of delay when “sufficient cause” is shown. The petitioner’s claim that the delay was due to ill-advice qualified as a genuine reason, making the delay excusable.

8.3 Principle of Substantive Justice Over Procedural Technicalities:

The judgment reaffirmed that procedural technicalities should not obstruct justice, especially when significant financial harm is involved. The court highlighted that the law should prioritize delivering substantive justice, ensuring that procedural errors do not lead to unfair outcomes.

8.4 Doctrine of Unjust Enrichment:

The court recognized the principle of unjust enrichment, asserting that the state should not benefit financially from collecting stamp duty twice for essentially the same transaction. The denial of the refund in this case would result in unjust enrichment by the state, which the court prevented.

8.5 Precedent and Equitable Relief:

The ruling is based on precedents that focus on the importance of delivering equitable relief. By referring to the concept of condonation of delay and citing Supreme Court precedents, the court demonstrated its role in ensuring that justice prevails, particularly in cases where rigid adherence to procedure would lead to unfair outcomes.

8.6 Refund of Stamp Duty:

The judgment reiterated that refund of stamp duty is a recognized legal right when stamp papers are not used or an agreement is cancelled, provided procedural formalities (such as timely filing) are followed. However, the court’s intervention in this case demonstrates its readiness to provide relief even when those procedural formalities are not strictly adhered to, under exceptional circumstances.

These principles collectively highlight the court’s commitment to ensuring that justice is not sacrificed due to technicalities, and that financial fairness is maintained through a judicious application of the law.

Doctrine of Unjust Enrichment:

This is very important doctrine in Indirect Taxation where many time the ultimate consumer who  has born the incidence of the tax can’t be identified and therefore the government can’t refund the same to such consumers if any such circumstance arise. This was vastly followed in  the Central Excise Act and now in Goods and Services Tax 2017. Under GST for getting any refund by any intermediary trader, he has to prove that he is the actual person who has born the incidence of tax and that he has not passed it on to some other persons. If he can’t prove it then the amount of refund will have to be deposited into the Consumer Welfare Fund by the government otherwise it would be treated like the government has collected tax without the authority of law as provided in Art 265 of the Constitution. By keeping the amount of refund, it could be said that the government is the beneficiary of the unjust enrichment, getting richer at the cost of the consumer.

That is why, while granting refund in GST Act the department take a CA Certificate that the party has not passed on the incidence of tax to any other person  and that only he has suffered this tax and therefore entitled to its refund.

The keyword given at the top of the article are those which can be used in any law which prescribe timeline for compliance and when there is a delay in compliance which need to be  condoned.